New US Chip Equipment Controls Include Notable Omissions, Researchers Say

Gregory Allen, a former Pentagon official who now leads the Wadhwani AI Center at the Center for Strategic and International Studies, noted that the latest FDP rule update represents a significant change from how the Trump administration first used the rule in 2020 to restrict sales of foreign-made chips exported to Huawei, which captured chips made with certain U.S.-origin technology or software (see 2005150058). When the latest Bureau of Industry and Security rule takes effect later this month (see 2412020016), U.S. licensing requirements for China will extend to any foreign-made chip equipment that includes any amount of controlled U.S.-origin components.

“That is basically all semiconductor manufacturing equipment on planet Earth,” Allen said on China Talk, a podcast hosted by Jordan Schneider, a technology and national security researcher with the Center for a New American Security. “So this is a pretty extraordinary expansion of the applicability of the use of the foreign direct product rule.”

Although the BIS rule carves out companies from certain countries from having to comply with the licensing requirements -- including major chip equipment makers in the Netherlands and Japan -- Allen noted that this was because BIS likely expects those companies to face similar export restrictions from their own governments.

“So if Tokyo Electron, a major Japanese provider of semiconductor manufacturing equipment, if they're shipping from Malaysia [to China], they're going to get hit by this new expanded interpretation of the foreign direct product rule,” he said. “And then if they're shipping from Japan, or if they're shipping from the Netherlands, they get hit by those local countries’ version of the foreign direct product rule.”

Dylan Patel of SemiAnalysis, a semiconductor industry research company, said during the podcast that this assumes that both the Japanese and Dutch governments have assured the Biden administration that they will “implement their own versions of the rules” in the coming months.

But both Patel and Schneider said that remains to be seen. Although BIS worked during the Biden administration to convince Japan and the Netherlands to adopt similar controls, those talks proved lengthy and broke down over several key export control areas (see 2411250028, 2407170040 and 2310270044).

“I think that the threat of really stuffing [the new Dec. 2 chip controls] down the Japanese and the Dutch throats, fundamentally, wasn’t credible,” Schneider said, "because the central ethos of the Biden administration was, after the Trump administration, we're going to do things nicely with our allies and partners, because we think this is a better approach to international relations and foreign policy.”

He said that has resulted in the Biden administration “playing this very long and complicated extended dance that leads to a 200-page regulation,” which chip companies will scour through to find loopholes. It’s “going to make export control lawyers more money than God,” Schneider said.

Allen made similar points, saying the controls don’t appear to be moving fast enough to keep up with the semiconductor industry and don’t fully account for clever workarounds. Some American chip companies, such as Nvidia, have rolled out new chips that fall just below the control threshold of U.S. export licensing requirements each time the government has updated those requirements (see 2211080005 and 2310240020).

“The appetite and the capacity of Chinese customers and the companies that want to sell to them to find legal loopholes is, like, infinite, and they don't take days off in that journey,” Allen said. “Whereas what our government has demonstrated is the ability to do one update per year. And that pace of legal innovation is nowhere near what we have seen from the Chinese export control avoidance networks.”

Although Patel called the latest BIS rule a “very, very necessary piece of regulation,” he also pointed to several omissions that could create loopholes for China to continue buying sensitive semiconductor-related items. “There are still some head-scratchers in here,” he said.

The rule introduced controls for high-bandwidth memory (HBM) and added a range of China-based fabs to the Entity List, but Patel noted that BIS didn’t add the HBM manufacturing subsidiaries of China’s ChangXin Memory Technologies (CXMT) or Huawei to the Entity List.

Patel said BIS license requirements should still capture certain exports to those two specific subsidiaries, but “there's some weirdness going on” in not adding them to the Entity List. He noted that CXMT is the “largest purchaser” of equipment from American chip tooling firm Applied Materials.

Allen said the omission was confusing. “You just have to ask, like, what are they thinking?” he said of the Biden administration. “You're saying, O.K. China, you're not allowed to buy foreign HBM anymore. But of all the companies that we could have chosen to exempt, your national champion in HBM is one of the ones that we didn't target. I don't get it.”

Patel also pointed to another “workaround,” noting that the new FDP rule restrictions appear to only apply to chip equipment but not any of their “subsystems.” This means that certain items sold by chip firm Ultra Clean, including cleaning equipment for chipmaking tools, aren't caught by the new license requirements, he said.

Ultra Clean mostly does business with U.S.-based Applied Materials and Lam Research, Patel said, but “recently they've been selling a lot to China.” He said they don’t “seem to be impacted unless the entity that they're selling to is on the Entity List.”

Schneider said he’s watching whether the U.S. will pursue large corporate penalties against chip firms for violating the various semiconductor rules BIS has released since October 2022. He noted that DOJ has brought indictments against some individuals for illegally exporting chips, including to China, but said the U.S. has struggled to bring “any major cases" against large firms.

“Frankly, the sort of enforcement actions which you could have done to Japanese firms, to American firms that really should know better about what they're doing just have not materialized over the course of the lifespan of these regs,” Schneider said. “Basically, there hasn't been a penalty on any of these companies pushing up to and probably beyond what the … broader intent of the regulation is.”

Schneider also said he was relatively unimpressed with how the new rules were written. He gave them a grade of a “C, C plus.”

“The reason this grinds my gears in particular is because a lot of things we want our government to do are hard. Educating a nation is hard. Pushing the frontiers of science -- hard. Peace in the Middle East -- hard. But export controls, let's be real. They're kind of easy,” he said.

Schneider said the mandate of BIS is to “write some regs, scare firms with billion-dollar fines, and voila, you have an effective global compliance regime.” But he said that hasn’t been the case.

“Firms and nations are about to put up with far, far more under a Trump administration to stay in America's good graces than what Biden could have asked them to do,” he said. “But full-send just isn't in modern Democrats’ vocabulary, so what we end up with is a too-clever-by-half policy that misses the forest for the trees.”